1. Field of Invention
The present invention relates generally to methods for publicly offering stock.
2. Description of the Background
Privately-held companies typically launch a public stock offering, often called an “initial public offering”, or an “IPO”, to raise needed capital to expand their businesses. Traditionally, the company mounting the IPO sets an initial price (the “IPO price) at which the stock will be offered to the public. The IPO price is typically established by an investment banker based on a number of factors, including how much capital the company needs to raise, public reception to the stock from institutional clients, such as mutual funds, brokerages, and money managers, the value of stock of similar companies already trading on the open market, and the IPO price of comparable companies that have launched recent IPOs.
Once the IPO price is established, the shares are traditionally subscribed to by underwriters, who buy shares of the stock from the company mounting the IPO at a discounted price such as, for example, seven percent off the IPO price. The capital raised by the offering company is determined by the amount of shares sold to each of the subscribing underwriters at the IPO price. The underwriters then typically sell those shares at the IPO price to large individual and institutional investors, including brokerages. It is those institutions which then initiate the public trading of the stock by selling the shares to investors in the open market.
Typically, the price at which the shares trade on the open market after the initial offering greatly exceeds the IPO price. The offering company, however, does not realize the additional capital associated with the enhanced share price of its stock. Rather, the capital raised by the offering company is limited to the number of shares offered at the IPO price (less the underwriter discount) during the subscription stage of the offering. The difference between the aggregate value of the shares after the IPO and the capital raised by the offering company is commonly referred to as “money left on the table”, because it represents additional money the company could have raised if the IPO price had better reflected the market demand for the stock.
In some instances, such as with some recent Internet IPOs, the amount of money left on the table, and hence unavailable to the treasury of the offering company, can be staggering. For example, on Dec. 10, 1999, FreeMarkets.com offered 3.6 million shares (or 10.6%) of its stock to the public in an IPO at an offering price of $48/share. Through the offering, FreeMarkets.com raised $173 million in capital. However, during the first day of trading, the share price for the stock soared from the IPO price (i.e., $48) to $280. Accordingly, if the company and the IPO underwriter had better anticipated the public demand for the company's stock, the company could have instead raised $1.008 billion. Consequently, the company effectively left $835 million on the table.
In view of the market demand for their stock, companies who have left a great amount of money on the table may launch a secondary offering to raise additional capital. A secondary offering, however, is not an initial offering in which a market for the stock is created. Rather, the share price for a secondary offering is contingent upon prior trading, and cannot be established by other pricing models such as the Dutch auction method. In addition, the secondary offering may dilute the value of the initially offered stock, thus decreasing the value of the stock held by company shareholders who acquired shares during the initial offering. Moreover, federal security regulations require a company to prepare a second offering memorandum before the secondary offering, thereby causing the company to incur additional expenses, such as the legal fees associated with the preparation of the second offering memorandum, before it can realize the additional capital from the secondary offering.
To minimize the amount of money left on the table, alternative IPO models have been proposed. One such alternative model is an electronic “Dutch auction method”, such as available at www.openipo.com (Open IPO is a registered trademark of W.R. Hambrecht & Co., LLC, San Francisco, Calif.). According to the Dutch auction method, investors who wish to buy stock in an IPO can simply submit to a subscribing underwriter of the offering a secret, on-line bid for the number of shares they desire. The bids may be above or below a price set by the underwriter. The offering company then sells its stock at the lowest bidding price that will enable the company to sell all of the shares it is offering. As a result, all the winning bidders ultimately pay the same price, which for some bidders may be lower than their bidding price.
Thus, the Dutch auction model allows an offering company to reduce the amount of money left on the table because the selling price of the initial shares is more reflective of the market demand of the stock. However, even with the Dutch auction model, a company launching an IPO can still leave significant amounts of money on the table because all of the offered shares are sold at the lowest bidding price which enables the company to sell all of the shares it is offering.
Accordingly, there exists a need for a method by which privately-held companies can raise capital commensurate with the fair market value of their stock through an initial public stock offering.